Compensating Balances

question 39

Multiple Choice

Compensating balances

• A) are a particular form of collateral commonly required on commercial loans.
• B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank.
• C) allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions.
• D) are all of the above.

Understand the historical changes in debt-to-equity ratios and how they inform current financial strategies.

Know the implications of taxes and bankruptcy claims on firm cash flows and capital structure decisions.

Understand the principles behind Modigliani and Miller propositions related to capital structure, taxes, and the cost of capital.

Identify the various factors affecting the optimal level of debt for a firm.

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Definitions:

Zero-Coupon Bond

A zero-coupon bond is a type of bond that does not pay periodic interest but is issued at a significant discount to its face value and redeemed for its full face value at maturity.

Yield To Maturity

The total return anticipated on a bond if it is held until its maturity date, accounting for interest payments and its current market price.

Rate Of Return

The accumulation or declination in an investment's value over an agreed period, indicated as a percentage of the investment’s beginning price.

Coupon Bond

A bond that pays the holder a fixed interest payment (coupon) at regular intervals until maturity, when the principal amount is reimbursed.